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If you haven't saved enough or nothing at all for retirement, an individual retirement account (IRA) may benefit you.
What Is an IRA?
An IRA is an account that offers tax benefits to help you save for retirement. Similar to a 401(k) through your employer, an IRA is intended to help you grow your retirement income.
You can open an IRA on your own through a bank or financial services company. There are several types of IRAs, like traditional IRAs, where you invest pre-tax dollars, and Roth IRAs, in which you invest after-tax dollars.
Some IRAs also have certain tax advantages. For example, money invested in a traditional IRA grows tax-free and is only taxed when you withdraw it. Depending on your tax filing status and income, your contributions also may be tax-deductible.
What Are the 2022 IRA Contribution Limits?
The IRS limits the amount you can contribute to an IRA each year.
- If under age 50 can contribute up to $6,000 a year.
- If age 50 or older can make an additional catch-up contribution of $1,000.
The amount you can contribute to a Roth IRA varies according to your income and filing status. For example, if you're single and make more than $122,000, your AGI (adjusted gross income) is between $129,000 and $144,000 in 2022, you only can contribute a reduced amount to an IRA.
How These Changes Could Affect Your Retirement Plan
Though a $500 increase to the IRA contribution limit may seem like a small change, it adds up over time. That additional contribution could end up being a lot of money in the future, especially if you open an IRA in your 20s and continue to invest part of your income over the next 30 or 40 years.
Thanks to compound interest, which is the interest you earn on interest, saving early and often could be the difference between a comfortable retirement and a financially tight one. If your income tax rate will be lower in retirement, as it likely will be for people who no longer have a regular income after they stop working, you may be able to keep more of the money you've saved.
The Bottom Line
Investing that extra $500 every year could be an effective way to put your money to work for you. The interest you earn on this extra money could bring you closer to your retirement savings goal and help you enjoy the quality of life in retirement you've worked year in and year out to achieve.